Behind PwC's layoffs: customer churn flocked to the "Big Three", and listed companies terminated contracts intensively

At the entrance of the office building in Block A of the Fortune Center in Beijing's East Third Ring Road, young people who have just finished their jobs can be seen walking out of the building with flowers in their hands for several days. Some people will stop in front of the building for a while, take out their mobile phones and take a few photos before leaving.

Li Yi (not his real name), who works in PwC's audit department, is one of them. "Just finished my resignation." Recently, downstairs in the Fortune Center, Li Yi told the first financial reporter that after receiving the company's layoff notice, he reached an agreement with the company on the layoff matters, and has completed the resignation procedures. "Recently, there have been a lot of resumes for PwC employees, and it is not easy to find a job, but newcomers always have to find a way out than being laid off in middle age." He said.

There are many people who have had similar experiences with him. Recently, PwC's offices in Guangzhou, Shanghai, Beijing, Shenzhen and Hong Kong have begun to lay off employees, involving audit, consulting and taxation. In addition to layoffs, employees in many branches have been notified to take "unpaid leave" or "career break", which in previous years was usually taken by employees to apply for leave after the end of the busy season to prepare for CPA exams.

"Taking unpaid leave is basically equivalent to taking a pay cut." Another PwC China employee told CBN.

A number of interviewees told Yicai that after being investigated for financial fraud in Evergrande and reported by insiders, PwC has lost a number of audit clients in a row, which is an important reason for PwC's layoffs.

"Due to changes in the external objective situation, we have optimized the organizational structure accordingly according to market demand." Previously, PwC replied to Yicai in response to the news of layoffs and employee vacations, saying that the adjustment was a difficult decision, and the company is gradually fully communicating with employees and ensuring that the adjustment plan complies with the relevant provisions of China's labor law.

The regulatory investigation into PwC is ongoing. Earlier this month, PwC's Asia Pacific and China chair changed, and Zhao Baiji retired at the end of his term, and was replaced by Li Dan, Head of Asia Pacific Audit and PwC Zhongtian Senior Partner.

The loss of large financial customers

In May this year, the China Securities Regulatory Commission announced the punishment for Evergrande Real Estate's financial fraud case, and Evergrande Real Estate and its then chairman and actual controller Xu Jiayin were fined for inflating revenue by 560 billion yuan in two years and fraudulently issuing bonds. At the same time, the China Securities Regulatory Commission said that it is promoting the investigation of relevant intermediaries and will strictly crack down on financial fraud in the securities market in accordance with the law.

The Hong Kong Accounting and Financial Reporting Council ("AFRC") launched an investigation into the case of Evergrande's financial fraud, and recently published the results of an anonymous whistleblower letter alleging deficiencies in its audit quality management system and audit quality of China Evergrande Group in March this year.

"The evidence gathered during the review was insufficient to support the three allegations relating to PwC's quality management system." In response to the investigation into the whistleblower letter, the AFRC said that the AFRC is conducting an independent investigation into the audit of PwC in relation to the allegations of audit quality of China Evergrande Group, and the relevant investigation is still ongoing.

The final findings have not yet been released, but PwC has been heavily terminated by a number of major clients in the past three months. Since May, more than 50 A-share and Hong Kong-listed companies have cancelled their cooperation, including 12 financial institutions.

According to incomplete statistics from CBN, 30 of PwC's 107 A-share clients last year have cancelled their cooperation. The seven new "investment promotion" customers originally planned for this year have all been terminated as of July 24. According to the audit fees disclosed by the above-mentioned companies in 2024 (if not disclosed, refer to the 2023 expenses), the audit fees involved in these 36 customers exceed 600 million yuan.

Last year, nearly 30 of the Hong Kong-listed companies of which PwC was the auditor cancelled their cooperation with PwC, and the audit fees involved in the above cancelled companies were about 200 million yuan based on the total fees paid to the auditors in 2023.

Among them, more than half of the 12 A-share financial customers have "lost orders" last year, including Bank of China, Chinese Life, Chinese People's Insurance, Haitong Securities, Bank of Hangzhou, Bank of Ningbo and Bank of Suzhou. In addition, China Merchants Bank, a new customer this year, has also been rehired to other firms. Among the Hong Kong stocks, there are also four financial institutions, China Taiping, China Cinda, China Property Insurance and China Reinsurance, which have successively changed auditors. According to the above-mentioned rough calculation, the total audit fees involved in these 12 financial customers are about 376 million yuan.

The loss of a large number of financial customers in A-shares and Hong Kong stocks is also considered to be the reason for the relatively high proportion of layoffs in PwC China's financial services audit department.

Recently, "PwC is considering cutting 50% of its Chinese financial services audit department, and 20% of other departments" and "PwC China partners will significantly reduce their salaries by up to 50%" and other online rumors have attracted market attention. Yicai learned from relevant industry insiders that there was news that the financial services audit department was going to lay off 50% of its staff, and PwC was previously terminated by a number of financial customers, which may indeed lead to a large number of layoffs in the corresponding line.

The reporter asked PwC officials for verification on the scale of layoffs in relevant departments and the salary cut of partners, but did not receive a response as of press time.

At the same time as customers terminate their contracts intensively, some customers also choose to "renew". According to incomplete statistics from Yicai, in this year's A-share annual report disclosure season, at least 65 of PwC's 107 A-share clients issued re-employment announcements last year, and as of press time, at least 36 companies' re-employment proposals have passed the 2023 annual general meeting of shareholders for deliberation. According to the rough calculation of last year's audit fees, the audit fees involved in the above-mentioned 36 re-hired A-share companies are about 137 million yuan.

In terms of Hong Kong stocks, nearly 60 listed companies, including Meituan, Kuaishou, SenseTime, and Tongcheng Travel, chose to renew their employment with PwC, and according to Flush iFinD data, the total fees paid by these 60 listed companies to PwC in 2023 will be about 320 million yuan.

In addition, PwC Zhongtian has also rehired a number of major clients in the U.S. stock market. Alibaba recently announced that it will continue to appoint PricewaterhouseCoopers as the company's accounting firm for fiscal 2025 until the end of the next annual general meeting. Previously, a number of overseas-listed clients such as NIO, Xpeng Motors, BOSS Zhipin, NetEase, Bilibili, Land Holdings, and OneConnect also continued to hire PwC. According to the statistics of Flush iFinD, the total fees paid to PwC by these eight re-employment customers, including Alibaba, in fiscal 2023 totaled about 368 million yuan.

Termination customers flock to the "Big Three"

As PwC's core business, audit accounts for nearly ninety percent of the firm's total business revenue. In the eyes of industry insiders, although some customers have renewed their contracts, it is difficult to offset the impact of losing many customers one after another.

"PwC's experience of this turmoil will be a big blow to the competitiveness of its business in China, and the competitive landscape of the 'Big Four' may be reshaped." An industry insider told Yicai.

For a long time, PwC Zhongtian, Ernst & Young Huaming, KPMG Huazhen, and Deloitte Huayong have occupied the leading position in the domestic audit industry. According to the 2022 ranking of 100 accounting firms disclosed by the Chinese Institute of Certified Public Accountants (hereinafter referred to as the "China Institute of Certified Public Accountants"), PwC Zhongtian has ranked first in this evaluation for 19 consecutive years since 2003.

From 2020 to 2022, except for Deloitte Touche Tohmatsu, the audit revenue of the other three accounting firms increased for three consecutive years. In 2022, the business income of the four major accounting firms of PricewaterhouseCoopers Zhongtian, Ernst & Young Huaming, KPMG Huazhen and Deloitte Huayong was 7.925 billion yuan, 6.646 billion yuan, 5.117 billion yuan and 5.150 billion yuan respectively, of which the audit business income was 6.837 billion yuan, 6.256 billion yuan, 3.788 billion yuan and 3.163 billion yuan respectively, accounting for 86%, 94%, 74% and 61% of the business income respectively.

At present, the 2023 comprehensive evaluation ranking data has not been released. According to the rough statistics of Yicai iFinD data, the total audit fees of A-share, Hong Kong and U.S. listed companies served by the "Big Four" accounting firms in China in 2023 will be about 11 billion yuan. Among them, PwC Zhongtian is 4.487 billion yuan, Ernst & Young Huaming is 2.779 billion yuan, KPMG Huazhen is 1.919 billion yuan, and Deloitte Huayong is 1.896 billion yuan.

Since the beginning of this year, according to Yicai statistics, as of July 24, more than 60 of the more than 60 A-share and Hong Kong stock customers who have lost orders from PwC have disclosed their whereabouts to the other three of the "Big Four". Among them, 13 chose KPMG, 14 chose Deloitte and 15 chose Ernst & Young. Among the financial institutions, including Chinese Life, Chinese People's Insurance, China Merchants Bank, Bank of Hangzhou, China Cinda, and China Property Insurance, 6 have all flowed to Ernst & Young.

Some of the clients of the three major foreign firms also made changes in their accounting firms last year, but the number of changes was relatively small. According to incomplete statistics from Yicai, as of July 24, among the A-share listed companies that plan to change or rehire accounting firms in 2024, at least 11 were auditors of Deloitte Huayong last year, 7 were Ernst & Young Huaming, and 4 were KPMG Huazhen.

In addition to auditing, the services of the "Big Four" firms also include assurance, consulting, taxation and other services. According to the data disclosed by the China Note Association, from 2020 to 2022, PwC Zhongtian's assurance and consulting business revenue declined for three consecutive years, and the overall income from taxation, construction and other income increased. Among them, the income of the consulting business declined more, and the income of the consulting business of the firm in 2022 was less than 8 million, which was half of the 16 million in 2020.

It is understood that since last year, affected by factors such as reducing costs and increasing efficiency and reducing expenditures, the business volume of PwC consulting and other lines has also declined. In this regard, Yicai tried to learn about the relevant business situation from PricewaterhouseCoopers, but did not reply as of press time.

Facing the pressure of shrinking budgets and low-price competition

In addition to the impact of special events, PwC's business growth is also under pressure from shrinking client budgets and low-price competition among peers.

Looking at the reasons for PwC's client change of accounting firm, many companies said that the change was based on the "principle of prudence", but did not specify the specific reason. According to an industry insider's analysis, the centralized termination of the contract by the listed company may be related to the firm's involvement in Evergrande's financial fraud.

In addition, there are also a number of companies that choose to change firms because the accounting firm has exceeded the service period, the company considers its own business development needs, and the two parties have not reached an agreement on the audit fee.

Several of these companies have reduced their audit fees for 2024. In terms of A-shares, such as China Railway, China Merchants Bank and Chinese People's Insurance in 2024, the audit fees to be paid are 25 million yuan, 29.8 million yuan and 13.5 million yuan, respectively, a decrease of 8.1 million yuan, 7.42 million yuan and 2.47 million yuan respectively from the previous year.

There are also some companies that choose to switch to domestic firms at a "low price" after canceling their re-employment. For example, Haitong Securities and China Railway Industry, which originally planned to re-appoint PwC, will have reduced their audit fees in 2024 compared with before after changing to other firms. Haitong Securities originally planned to re-engage PricewaterhouseCoopers with an audit fee of 9.8 million yuan, but after the re-appointment ·of Fong, Fong, Deloitte and Guan Huang Chenfang, the audit fee became 7.9 million yuan, a decrease of 1.9 million yuan; After China Railway Industry rehired Tianjian, it decreased by 1.18 million yuan compared with the renewal of PwC.

In addition, among the clients who did not choose to renew PwC this year, such as Guangdong Electric Power A, Beichen Industrial, and Qingdao Port, the audit institutions in 2024 will be changed to Grant Thornton, ZTE, and ShineWing respectively, and the audit fees of the three companies will be reduced by more than one million compared with 2023.

Among the Hong Kong stock clients, there are also listed companies that choose to change offices due to cost reduction and efficiency increase, and audit fees are not agreed. On July 19, Lancang Ancient Tea, a Hong Kong-listed company, said in an announcement that the company's board of directors decided to replace PricewaterhouseCoopers and appoint another auditor due to the company's development needs and the consideration of reducing costs and increasing efficiency. Previously, there were also companies such as Jingye Mingbang Group and Baiben Medical Care that chose to replace auditors because the two parties did not reach an agreement on audit fees. The above three listed companies were replaced by three accounting firms, Kaiyuan Xinde, Debo and Guowei.

A number of interviewed accounting firms said that shrinking customer budgets and low-price competition among peers have become common phenomena in the industry.

"In the past two years, [PwC's] business volume has indeed declined." A former PwC China employee said that due to the reduction of customer expense budgets, the budgets of audit and consulting projects have decreased, and in this case, the cost performance of foreign-funded institutions is very low.

(This article is from Yicai)